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Steamrollered by the Dell Machine
Dell finds it hilarious that HP and Sony fund researchers to come up with new ideas

By Steven Levy
Newsweek


Feb. 21 issue - Of all the cards dealt to Carly Fiorina, the now departed HP diva, there was one that just couldn't be played. Dell. She fought like a tiger to merge her company with Compaq, hoping that two of the more innovative-minded computer makers might bring on some agita for Michael Dell and his CEO Kevin Rollins. But last spring at an industry confab, Rollins was boasting that Dell reaps more than 100 percent of the profits in the entire industry. Sounds weird, but think of it this way: Dell is making big money while everybody else combined is operating at a loss. Sorry, Carly.

In Dell's view, only one big player has a right to exist in the business of selling Windows-based PCs—the firm Michael Dell founded in his college dorm room. Profitless rivals should take up something with a better chance of putting change in their pockets. In fact, IBM, once the gold standard in PCs, recently did just that, selling its laptop business to a Chinese company called Lenovo. And now that Carly has left the building, there's speculation that HP itself might bail (though at the moment the company is holding steady).

Why can Dell pile up the bucks when others rarely use their black-ink cartridges when printing out quarterly results? Dell's direct-sales model gives it dollars others share with retailers. Its low component costs keep prices down. And the business is run superbly. What's more, Dell saves money by not spending its shekels to seek major breakthroughs. That path (as opposed to spending R&D money on things like product integration) "squanders shareholder money," said Rollins.

Dell finds it hilarious that companies like IBM, HP and Sony fund researchers to come up with ideas that break the mold. PCs, says Dell spokesperson T. R. Reid, have reached a period of "standardization." They aren't the glamorous gizmos they were in the industry's early days. They are commodities, largely undifferentiated devices loaded with the chips made by Intel, running the software made by Bill Gates's minions. Dell doesn't like the term commoditization—it makes PCs sound cheesy. But the company nonetheless owes its success to it, because commoditization eliminates differences between its products and those of its competitors. That means it competes on cost, service and business model.


But wait a minute—hasn't Steve Jobs at Apple proved that you can innovate with personal computers? Not according to Dell. "Is it innovation if no one buys it?" asks Reid, noting Apple's meager 5 percent market share.

By that measure, the work done by Xerox's researchers in the '70s—mouse, windows, menus and all that stuff—was not innovation but waste, even though those breakthroughs later became integral to every modern computer, including those sold by Dell. Treating computers as commodities is a self-fulfilling prophecy that may only ensure that the great advances will come elsewhere.

Microsoft's leaders love to talk up innovation in the PC industry. Yet they profess to be unconcerned with Dell's march to dominance. When I brought up the subject to CEO Steve Ballmer, he noted that with all Dell's triumphs, it has only a third of the U.S. market and a smaller share globally. Of course, if others drop out those numbers will rise, but "it's not something we can control," he says. Meanwhile, Bill Gates thinks that Dell's ascent is just wonderful. "Those guys are smart, smart capitalists," he says.

That's a claim that no one would dispute. But as far as consumers are concerned, broad competition—and groundbreaking products that make our hearts go aflutter—is much better than ho-hum boxes churned out by a dominant industry giant and a bunch of overseas no-names. The Wintel world would benefit from a Steve Jobs-level product-and-marketing genius who would test the canard that PCs are doomed to be commodities. Come to think of it, has HP's board thought of paying a visit to the man in Cupertino?

© 2005 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/6959937/site/newsweek/